Hurdle Rate, the Zero Lower Bound, and Investors’ Active Risk Taking

56 Pages Posted: 30 Jul 2018

See all articles by Woon Sau Leung

Woon Sau Leung

The University of Edinburgh Business School, The University of Edinburgh

Zhongyan Zhu

Monash University

Date Written: July 29, 2018

Abstract

We add an internal “hurdle rate” to explain fund flows of fixed income mutual funds. Hurdle rates are inelastic and heterogeneous. Investors with zero hurdle rates always fol-low fund performance. When fund returns fall below the positive hurdle rate of an investor, the investor would no longer follow relative performance. Rather, the investor will seek riskier mutual funds to match his/her hurdle rate, a behaviour we refer to as “active risk taking”. Our empirical design identifies the external condition on which investors with positive hurdle rates could switch to active risk-taking in large scale. The condition is zero lower bound.

Keywords: Hurdle rate, zero lower bound, fixed-income, fund flows, risk-taking, mutual fund

JEL Classification: G20, G23, G28

Suggested Citation

Leung, Woon Sau and Zhu, Zhongyan, Hurdle Rate, the Zero Lower Bound, and Investors’ Active Risk Taking (July 29, 2018). 31st Australasian Finance and Banking Conference 2018. Available at SSRN: https://ssrn.com/abstract=3222351 or http://dx.doi.org/10.2139/ssrn.3222351

Woon Sau Leung

The University of Edinburgh Business School, The University of Edinburgh ( email )

29 Buccleuch Pl
Edinburgh, Scotland EH8 9JS
United Kingdom

Zhongyan Zhu (Contact Author)

Monash University ( email )

Melbourne
Australia

HOME PAGE: http://sites.google.com/site/zhougyanzhu/

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